Chorus latest: Adams expects EY review taster this week

Dec 3: After three days of spectacular falls - part of a dive that has seen the company halve in value since August - Chorus shares stabilised today.

In mid-morning trading, shares [NZX: CNU] was up 2.78% to $1.48.

Late yesterday, Prime Minister John Key hinted the government might renegotiate Chorus' UFB contract.

Telecommunications lawyer Michael Wigley told NBR that while the government needed to change the law to over-ride the Commerce Commission's determination to cut Chorus' copper line pricing by 23%, Chorus' UFB contract could be altered without recourse to legislation.

This morning, ICT Minister Amy Adams said EY Australia's independent review would report next Thursday (Dec 12), but added "we’re hoping to have an early indication of where that will go perhaps later this week." 

Ms Adams says the intial briefing from EY will be a draft - and perhaps an oral rather than written report. The final report is due by year's end. The government has not set a timetable for its response.

The Prime Mininster said that if the review found Chorus could not complete the UFB rollout "under its own scheme" after the Commerce Commission-mandated 23% cut to its copper line pricing, then Crown Fibre Holdings could potentially renegotiate its contract with Chorus.

Ms Adams elaborated later in the morning at stand-up media briefing, "What I’ve been clear about all the way through is that the first step is that we expect Chorus to consider what they can do to meet their obligations – they have a legal contract and the first step is for them to address it. If there is a risk to the roll out of Ultra-Fast Broadband, that’s something we don’t want New Zealand to miss out on, so if Chorus are unable to meet it under their own steam then the next step would be for Crown Fibre Holding to meet with Chorus and see whether contract changes could be negotiated which could help that."

The PM has ruled out extending the UFB rollout, but other "soft bailout" options include giving Chorus more time to pay back money loaned by the government (half of the $929 million being invested by the Crown is in the form of interest-free debt securities), or lending Chorus more money on soft terms.

Yesterday also saw Chorus take two measures that could help it if not avoid, then at least delay the price cut pain.

Yesterday afternoon also saw the company file a High Court appeal against the Commerce Commission's price-cut ruling, and exercise its right for a final pricing principles (FPP review).

Forsyth Barr analyst Blair Galpin notes the FPP process could take up to two years, by a Commerce Commission estimate. Previous Hight Court cases involving telecommunciations sector regulatory issues have lastes years - and in the 0867 case a full decade.

Friday, Mr Galpin recategorised Chorus from medium risk to high risk, and cut the company from buy to hold. As things stand today, the ForBarr analysts expects dividends to be canceled for the next two years.

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Dec 2: Chorus shares [NZX: CNU] were down 7.54% to a new all-time low of 1.41 in midday trading.

The latest fall comes at a time of increased uncertainty for investors. Analyst are united in downgrading Chorus, but split on whether the costs and penalties involved would make it worth walking away from the UFB.

And lawyer Michael Wigley - a telecommunications sector specialist - says Chorus abandoning the project would be very difficult from a legal standpoint, while Chorus "being allowed to throw in the towel" would imperil future public-private partnerships, and possibly violate NZ's free trade agreements.

In any case, the refusal of government allies ACT, UnitedFuture and the Maori Party to support legislation to overturn Commerce Commission-mandated price cuts indicates National would have a difficult time gaining support for a Chorus bail-out measure.

The company's shares have fallen each session since Thursday, when minor parties went pubic with their refusal to support a law change.

Thursday, shares dipped 2.5%, Friday they closed down 15%. The company has now more than halved in value. to a market cap of $558 million, since the latest regulatory controversy hit in August.

This morning on TVNZ's Breakfast, Prime Minister John Key said the UFB would go ahead, and finish by its original target date of 2020. The government is waiting on EY Australia's independent review, due mid December, before deciding on its next steps.

The PM said, "We were never going to use legislation because we knew right from the get go people wouldn't vote for that."

A member of the Coalition for Fair Internet Pricing was quick to point out that all three proposals outlined in a discussion document released by ICT Minister Amy Adams in August involved legislative changes.

Chorus shares in freefall

Investors have reacted sharply to yesterday's poltical developments. ACT and UnitedFuture said they would not support legislation to over-ride the Commerce Commission's October 31 determination to slash Chorus pricing - blocking the government's presumed path to assist the company.

Shares [NZX:CNU] closed down 2.5% yesterday to a new low of $1.78.

In early trading today they were down nearly 16% to a fesh all time low of $1.50.

In August, before the latest regulatory controversy broke, Chorus was trading above $3.

This morning say Forsyth Barr - hitherto one of Chorus' few remaining boosters - downgrade the company from "buy" to "hold", and recatergorise it from "medium risk" to "high risk".

Analyst Blair Galpin sees dividends - 24 cents per share or $95 million last year - cancelled for the next two years.

ForBarr has even gone as far as running the numbers on a Chorus withdrawal from the multi-billion dollar UltrafastBroadband (UFB) rollout.

The government has hired Ernst & Young Australia to run the ruler over Chorus's books to see if it has the financial capability to deal with a Commerce Commission imposed cut to services on the copper lines.

Waiting for EY
Communications Minister Amy Adams is mulling how to respond to Telecommunications Commissioner Stephen Gale's planned 23 percent price cut for access to Chorus's regulated copper lines, which the network company says will force an overhaul of its capital structure and may threaten the taxpayer subsidised build of national fibre cable infrastructure.

Ms Adams said yesterday the stance by other political parties wasn't unexpected, and that the government has been considering a number of non-legislative measures for some time.

She told Radio New Zealand's Checkpoint programme legislating would have been the government's least preferred option, and that the government is waiting to see EY's analysis to determine what slack Chorus can pick-up, before deciding what steps to take next.

Other options open to the government are changing the terms of Chorus's contract to build the UFB network, which could include shifting the milestones the company would have to meet.

Chorus chief executive Mark Ratcliffe told RNZ's Morning Report programme there were "many, many options" still available, including the ability to vary the company's contract with the Crown for the UFB rollout.

The UFB project was a public-private partnership, making the Crown a "critical" element in whatever approach was determined, Mr Ratcliffe.